Life Insurance: What is your ‘rule of thumb’?

Monday, November 24th, 2008 by Charles Mayfield, CFP®


Whether it is near the water cooler at work or following a pickup game at the gym you may have been told the magic formula to calculate how much life insurance you need.  Let me guess; someone told you 7 times your salary or was it twice the value of your home?  Was it $500,000 for every child you have?  I can’t tell you one magic formula for how much life insurance you need.  What I can tell you is there is a way to properly analyze your individual situation, and figure out the right amount for you to have.

Here are a few of the things to consider when calculating your life insurance need:

Immediate Cash Needs:  What current debts, expenses and costs do you want paid immediately upon your death?  Some examples include: burial, consumer debt & 6 months of living expenses.

Income Needs:  What percentage of your income do you want replaced and for how long?  This is a very subjective number.  It will boil down to a personal preference combined with some financial calculations.   The final calculation should incorporate short and long term goals for the family.

Goal Oriented Needs:  Would you like the house paid off, or the kid’s college expenses taken care of?  We can predict what the cost of most goals and expenses will be in the future.  This number is fairly straight-forward.

Talk to an independent financial advisor or CERTIFIED FINANCIAL PLANNERTM about how to tie all three of these needs together.  Be prepared to discuss your ultimate vision of your family or business after you are gone.  The clearer you paint that picture, the easier it will be to pinpoint a plan that is right for you.

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